Investors are growing concerned that directors are ill prepared for cyber security incidents and technological challenges.

Investors target Board Directors for cyber security incidents

An investor “We want the board to be tech savvy, but we wouldn’t just want it to be a tech board. Our fear is they appoint a tech expert but then no one else on the board is engaged. We want to understand the extent to which all the board is competent.”

Earlier this week, British Airways was forced to vow to compensate passengers after it revealed hackers had stolen data relating to about 380,000 customers from its website and mobile app during a two-week period in August. The data included personal and financial details.

Companies ranging from Equifax to JPMorgan Chase have all suffered data breaches in recent years. Meanwhile, large multinationals from Moller-Maersk to Reckitt Benckinser and FedEx were all forced to warn shareholders that the NotPetya cyber attack in 2017 had hurt profits, potentially costing each company hundreds of millions of dollars.

Ovidiu Patrascu, research analyst at Schroders, says it is crucial that companies have well-resourced cyber security teams that should ideally report directly to the highest levels of the organisation.

“As seen in a number of recent high-profile public failures, data breaches often uncover poor governance practices and weak management at the heart of companies, while also hitting their revenues and intangible assets such as reputation and trust,” he says.

“Cyber risk should also not just be the preserve of tech specialists — company boards also need to ensure they understand and can effectively oversee these very particular risks,” he adds.

A 2017 study by the Ponemon Institute, a research centre, found that there had been a 22.7 per cent rise in the cost of cyber security for businesses in just one year. It also found a 27.4 per cent rise in the number of data breaches at businesses, based on 2,182 interviews from 254 companies in seven countries — Australia, France, Germany, Italy, Japan, the UK and the US.

A follow-up study in 2018 found that the average cost of a data breach globally is $3.86m, a 6.4 per cent increase from the 2017 report. It also warned that so-called “mega breaches”, ranging from 1m to 50m records lost, could cost companies between $40m and $350m to deal with.

For many investors, the fact that a huge technology company such as Facebook could suffer a data breach has hit home how vulnerable smaller or less tech-savvy businesses could be. In July, Britain’s Information Commissioner’s Office hit Facebook with its first financial penalty over the data leak to Cambridge Analytica, accusing the social network of breaking the law.

A big investor at a large asset manager says that he wants boards to be able to explain where their key vulnerabilities are and whether they have stress tested the financial impact of tech issues. “We think every board member should be able to speak about this issue. They need to know where they are vulnerable, what the impact could be and how the board would respond,” he adds.

Mr Krefting says he wants the businesses M&G invests in to clearly outline in their reports and accounts what risks they face when it comes to technology and cyber security. “When we talk to companies about this, they often clam up — either because the CEO or chair doesn’t know about it or it is delegated to the chief information officer or someone below the board, or they say this is too sensitive.”

But he adds: “We want policies on governance and structures and how they are approaching cyber. We don’t necessarily need to know how many times they were faced with attempted hacks last week, but we want to see processes and that they are doing testing and that the right controls are in place.”

This article was first published by the Financial Times at https://www.ft.com/content/c70caa94-2d88-3ece-b802-79e9bac2f32c.

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